The Great Electronic Frontier

The federal government envisions an efficient, high-tech nation -- a place where smart cards replace food stamps and maybe even cash.

American government is on a trailblazing journey towards a paperless society. As of 1996, U.S. welfare reform legislation mandates that every state replace its paper food stamp system with an Electronic Benefit Transfer (EBT) scheme by the year 2002.

Already, many states use magnetic-stripe cards, an online technology that's compatible with every ATM up and down Main Street, USA. "Most states are looking for the lowest-cost solution," said Tim O'Conner, director of the USDA Food Stamp Program. "At some point, we will see a migration from online to offline [smart card] technology, but right now we're still looking to get out of paper and into electronics. And since ATMs are everywhere, most states just say, 'Let's ride the commercial infrastructure.' Thus, magnetic-stripe cards represent EBT's first step."

Ohio and Wyoming, however, decided to leap ahead with offline EBT technology in the form of smart cards. Ohio just paid Citibank $7 million to install smart cards and run the state's EBT program through June 1, 2003. Wyoming is currently reviewing similar contract proposals before the state expands its EBT smart card program statewide. "As far as the states go, it's being looked at as a pioneering effort," said Terry Williams, Wyoming EBT smart card project manager.

Why Smart Cards?
Smart card technology has really advanced in the last several years, and its pace has increased exponentially. Today, these little plastic cards can receive, process, store and transmit thousands of bytes of data. It all happens in a dime-sized metallic plate that houses a central processing unit, random access memory and data storage.

"The main advantage of smart cards is that they offer a secure, portable data file," said Dan Cunningham, president of the Smart Card Industry Association. "They can carry their attributes with them instead of having them stored elsewhere. It allows an individual to keep their information private in their own cards."

With smart card technology, there's no need to dial up to a mainframe. All the interaction takes place between the card and the point-of-sale device. So, if every phone line went down, people could still conduct business as usual.

"Also, recipients prefer electronic issuance to paper coupons because they remove the stigma of using food stamps. And, smart cards offer a lot more security. It's just one of those win, win, win situations," added O'Connor.

Ohio
Ohio got a head start with smart card technology. The state has hosted pilot programs in Dayton since 1992 and has been planning to roll out a statewide smart card scheme since 1994.

"Right now, smart cards are working nicely for the state," said David Schwartz, Ohio EBT project director. At the beginning of each month, welfare recipients take their smart card in to a clinic to get it loaded up with personal information, including a PIN [personal identification number] and their benefits. They can use it at most retail stores until the benefits run out.

"It really surprised us when the population accepted it so readily," added Schwartz. "There were no concerns or hesitations at all. Now, even the retailers like it because the transaction speed is a lot faster than online [magnetic-stripe cards], and they don't have to worry about a large influx at the end of the month."

Ohio awarded Citibank a seven-year contract to run the system -- an investment the state thinks will pay off in the long run. Officials expect the state's monthly cost of distribution -- per household -- to drop from $3.84 with the old paper system to $2.89 using smart cards. Right now, however, Ohio spends more than states using the existing online technology.

Smart card opponents argue that magnetic-stripe cards provide a much cheaper option than smart cards (by about $7 million in Ohio's case) and that taxpayers would save money if government would simply wait for a smart card infrastructure to develop. Nevertheless, Schwartz believes that early implementation of the smart card system puts the state in a position to keep up with the technology as it changes.

"Smart cards will be the technology of choice in the future," said Schwartz, "and, for once, government took the lead when we decided to roll out the smart card project. I think most states are waiting to see what happens with Ohio."

Card Security
As customers enjoy the speed and convenience of online transactions, merchants appreciate the security. "Retailers and banks are excited about the electronic trail these cards leave behind," said O'Conner. "They will have a better ability to find certain types of fraud and go after it."

When people lose their smart cards, they can place a lock on the card by calling an 800 number. If the lost or stolen card is placed into a reader, the PIN will fail. This is because the readers go online every 24 hours to upload the day's transactions and download information. A missing card is simply replaced with another card, which contains the same information that was last uploaded before the first card was reported lost or stolen.

What if welfare recipients use their EBT cards to buy liquor or other non-food items? It happens all the time. Sometimes clients even walk into stores and buy liquor and other non-food products for 50 cents on the dollar. Fortunately, the information acquired from the stores' daily uploads helps EBT investigators cut down on such fraud by leaving an electronic trail.

"We look at all that data and do statistical analysis to see what looks out of the ordinary," said Joyce Kohler, a federal EBT account executive. "We can go to the store with the data and say, 'We believe you are trafficking, and we want you to withdraw from the program.' We just want them out.

"There's also an inhibition for welfare recipients who sell their cards for cash to purchase non-food merchandise," added Kohler. "Cardholders would have to give away their [personal identification] numbers, and buyers never know for sure how much is left on the card. They could be getting ripped off themselves. So the street trafficking is not as prevalent either."

Wyoming
Like Ohio, Wyoming benefited from smart card pilot programs. The rural state is one of USDA's designated sites to test "advanced card technology." It's been running the field demonstration since April 1995, and the state intends to maintain it until a contract for a statewide roll out is chosen.

Wyoming's system has welfare recipients personalize their smart cards at a nearby clinic by selecting a PIN and three convenient retailers. At the beginning of each month, they stop at any of the selected stores and enter their card and PIN into the machine. Their first transaction loads any benefits they have coming to their card and provides them with a receipt. After the money downloads onto the card, they can shop at any authorized retailer.

"Our experience is that smart cards make a lot of sense, particularly in a rural, frontier environment -- where there aren't always phones lines," said Terry Williams, Wyoming EBT smart card project manager. "Since the benefits are downloaded to the card, there's no need to dial up for long-distance authorization every time a transaction takes place. We are also looking at it as an electronic service platform [from which] we can run multiple programs."

Wyoming already runs the Women, Infants and Children (WIC) program with smart cards and plans to administer several more offline schemes as well. Williams believes that improved smart card technology allows Wyoming to enjoy an efficient, smooth-running and paperless welfare system capable of adapting as needs change now and into the future.

Branching Out
Public assistance programs represent the first widespread use of smart cards in the United States, but such projects won't be the last.

Pilot programs are springing up everywhere. Currently, a smart card project launched in Manhattan's Upper West Side brings the idea of electronic cash to New York consumers and merchants. MasterCard, Chase Manhattan Bank, VISA and Citibank run the project using Mondex -- the world's leading electronic cash system. With almost 700 merchants participating in the pilot program -- including several well-known New York retailers like Fairway, Sloan's and The Athlete's Foot -- the program is providing consumers with a more convenient way to make small transactions.

Smart card technology and infrastructure in some countries have improved enough to handle most of society's small, everyday transactions. Australia, for example, is thinking about using smart cards as a replacement for all currency, and it already has a large smart card infrastructure, which makes it an ideal country for testing a fully electronic system of currency.

Australia doesn't intend to replace debit and credit cards, which account for 85 percent of its retail transactions. Rather, smart cards will replace everyday currency, which the country uses for 90 percent of its small purchases -- such as bus fares, groceries and movie tickets.

Amazingly, smart cards could replace currency in America as well. The EBT mandates show a national understanding that government needs to take the initiative when it comes to technology advancements, rather than just riding the commercial infrastructure. With their statewide smart card programs, Ohio and Wyoming have taken the initiative -- one that will spur America on into the great electronic frontier.